No, they can't release a current gen processor because it goes against their entire storage price point.
First off, that kind of storage is stupid cheap. Secondly, the storage and the processor don't correlate together in terms of profit as they are two different components.
Don't you ever wonder why it costs $100 for an extra measly 16GB?
It's not that I never saw or disagreed with the point of Apple making money from added capacity. I understand this principle very well as it dictates the cost of every iOS device I own and I own quite a few these days.
This said, it has very little to do with your argument of keeping the costs on such a device down by using an older processor, hence my inclination to disagree and/or not take you seriously. Though the boldfaced word below doesn't help either.
That is where they make insane profits and what makes the iPod Touch a bargain compared to other i -devices. iTouch cannot exceed $400 because no one is going to pay that for an iPod.
Apple doesn't need to up the cost on an iPod touch to up the CPU. Apple does this all of the time with iPhones, iPads, and now iPad minis. The prices of which don't change from generation to generation (iPad minis being the only exception to this rule so far).
This device is geared towards teens who need storage for multimedia.
I'm sorry, but what teen in 2013 can't just get an iPhone with that kind of storage at the same price point? It's geared towards anyone who either can't or won't get an iPhone. Not just teens who, for whatever reason, can't get an iPhone.
The price much match the market and it is already at the high end.
Compared to what products? Aside from the ever-flat-selling Samsung Galaxy Player, I don't believe there are any serious competitors in the non-smartphone smartphone-OS-based personal media player market and therefore it is a market that Apple can completely dictate pricing on. Though please correct me if I am wrong.
The A7 released next year will run anything in the App Store just fine for another two years.
Being behind like that blows as it shaves one year off of the life cycle of an already disposable device. How do you not appreciate that?